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HR and coping with expanding financial regulation

Mark Hamilton

The roll-out of a major piece of regulation governing the responsibilities of senior staff has placed HR leaders on the front line of financial services reform. Article by Mark Hamilton, a partner in the employment, pensions & immigration team with Maclay Murray & Spens LLP, soon to become Dentons.

With the rules focused on key individuals and their allotted roles, HR directors will have to walk a tightrope, as they re-write contracts and re-classify roles according to responsibility – and could themselves be handed onerous regulatory responsibilities. The Senior Managers and Certification Regime (SM&CR), which so far applies only to UK banks, building societies, credit unions and investment firms designated by the Prudential Regulation Authority (PRA), is being extended over the next year or so to all firms regulated by the Financial Conduct Authority (FCA).

The FCA’s objective is to make senior individuals in regulated firms personally responsible – and indeed liable – for regulatory compliance and the behaviour of their teams. The new regime also makes firms take on the burden of certifying many of their own employees as fit and proper.

At the heart of the rules is a raft of key ‘Prescribed Responsibilities’ which will have to be clearly allocated to designated senior managers – who will still need to be pre-approved by the FCA. If something goes wrong there is meant to be no wriggle room allowing these individuals to duck responsibility – so a careful drafting of contracts and job roles with the bigger picture in mind is essential.

This will require firms to identify their senior managers – and the sooner the better. Their contracts must be dusted off, checked and probably updated to be consistent with their Prescribed Responsibilities. These managers will be responsible for the other elements of the regimes and are likely to want to be closely involved in designing the way in which those regimes are implemented. There may also be knock-on effects on team structures and salaries, involving re-negotiating contracts with the most senior employees, along with any changes to remuneration and directors and officers insurance which may be required.

Identifying a firm’s senior managers and publicising their status may be a fraught exercise: while focus needs to be given to the new senior managers, it should not be forgotten that some senior individuals may be unhappy about not being made senior managers – leading to a different set of problems.

Below senior managers, a potentially substantial group of employees need to be certified by the firm as being ‘fit and proper’ to carry out the key elements of their roles. These individuals will need to be re-certified each year. While many of these employees will currently be approved persons, it seems likely that many more will require to be certified in the future. As the FCA is moving responsibility for certification to firms, HR directors must identify the employees that need to be certified, and how they will go about certifying them.

While it is likely the SM&CR will not come into force for new firms until next autumn, at the earliest, this preparatory work needs to be done in advance to minimise the pain once they do take effect. In the interim, when recruiting new staff that may come within the scope of the new regimes, the selection process should take this and the requirement for regulatory references covering six years into account to minimise disruption once the SM&CR is in place.

Now is also the time to review how your appraisal processes will fit in with re-certifying staff as fit and proper. Given that appraisals are usually intended to be a positive experience and most managers dislike difficult conversations, it is all too easy to envisage circumstances where concerns about fitness are raised for the first time on annual re-certification, without having been previously raised at appraisal. While a firm should not re-certify if it has genuine concerns, it could find itself facing constructive dismissal or breach of contract claims in such circumstances. To reduce such risks, it is important to ensure that processes and contracts allow flexibility where there is any doubt about fitness or propriety. Further difficulties could be caused receiving updated references from previous employers up to six years after recruitment. The processes to manage these issues need to be approved by the senior manager responsible for compliance with the SM&CR.

Even if an employee is neither a senior manager, as defined by SM&CR, nor Certification-level staff, the vast majority will become subject to the new conduct rules. Most of these employees will never have been subject to FCA regulation before, and will not be aware of the impact a breach of the rules could have on their careers. Such breaches have to be notified to the FCA and may make it very difficult to obtain another job in the sector let alone promotion into a Certified staff role.

Senior executives cannot simply direct employees to review the FCA website to read the conduct rules. One of the prescribed responsibilities is to ensure individuals are made aware of and appropriately trained on the Conduct Rules as well as notifying breaches to the FCA. One scenario is, therefore, that the board may wish to assign this responsibility to the HR director. If so, pre-approval and personal responsibility for ensuring compliance with the conduct rules would come with that.

With a year to go until SM&CR comes into force, HR departments at FCA-regulated firms face a substantial workload. Immediate priorities should be: Identifying your intended Senior Managers and their Prescribed Responsibilities; Reviewing your compliance governance arrangements; Identifying your Certified Staff; Reviewing your contracts and procedures; Updating insurance arrangements; and Developing training on the Conduct Rules.

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